Risk Reward in Trading strategies

[ifeliluzaj]

Hi

I know this subject has been scrutinised on this site many times before, apologies, but here we go anyway.

Reading through threads on this board and advice in many books, the consensus view seems to be that genrally when traders are looking at trading strategies, they automaticaly try to go for 1:3 risk reward (as in 10 tick risk for 30 reward) or at the very least 1:2.

I've tried to trade from that angle for years but the more I trade Risk/reward ratios that are on the face of it unattractive, the more it looks like the 1:3s strategies are overcrowded and are therefore less profitable.

In the last 6 months I have been trading some "unattractive" risk/reward ratios such as 1:1 or less where you have a high strike rate, this seems to work well, even if it is uncomfortable to do.

It makes me wonder whether the 1:12 but 80% losers end of the spectrum is also attractive because of the lack of punters trading at that end of the RR spectrum.

What do you think ?
__________________
Markets can be beaten, but not all the time

[ilewoxopinohe]

I dont quite get the last statement but....

EUREKA! At last! A trader who has managed to think for himself and realise the light at the end of the tunnel! Well done.

Just because it says so in the books, dont mean its right. Are authors traders? No! They are authors trying to sell books.

You've got to do what works for you. There is no right and wrong in this game, only profit and loss.

[inseheriadary]

BBB has written some of the best words ever on this bb.
The whole business is about thinking for yourself and not assuming what you read is correct. I've read quite a few books and the vast majority of what is said about the non - mental part of trading is gibberish.
By all means test ideas you've read, but always think laterally and for yourself. It's not surprising that the vast majority of wannabees fail -
four reasons
a) they can't do it psychologically
b) they don't trade the plan
c) they believe what they read in books and on web sites without testing thoroughly - and testing it live.
d) they really haven't a clue what they are doing and think it's some sort of easy game to play
Richard

Like BBB implies - it's what actually works in the real world that matters - nothing else
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[incideinors]

Quote " In the last 6 months or so doing some trading on for example 1:1 or less where you have a high strike rate seems to work well, even if it is uncomfortable to do. "

Actually , you are spot on ..

As a trader one would need either to trade the oscillation and go for higher number of wins and take profit quick ( 1:1 ratio ) or trade the trend and take more losses but the let profit run to achieve the 3:1 ratio

TWO facts:--

1) Market oscillates around 3 times more than it trends

2)The probability of achieving higher reward/risk is less that of the lower reward/risk.

Just one concept for you to think about.. THERE IS NOT SUCH A THING AS TREND .. ALL TRENDS ARE OSCILLATIONS IN DIFFERENT TIME FRAMES...

Regards

[ipurusoguveh]

Mmm. This is very interesting.

I've been considering how I can acheive a higher win ratio and thus a smoother equity curve.

Until now, I've always shot for the 3:1(+) ratio, with a trailing stop which locks in 1.25:1 profit after movement in my favour of 2.25:1.

However, that means that the trade needs to move 2.25 times my risk in order to lock in 1.25:1 profit.

I've considered taking half profits straight away at 1.25:1 but have previously been put off by the fact that it reduces profits on the trades that do run to 3:1 or more.

I suppose I've always used 3:1 for reasons covered previously. ie that's what the books say. However, the more I think about it, the more it makes sense. I think maybe the best approach is to take 1/2 profits quickly, at maybe 1 to 1.25:1 and let the other half run with a trailing stop.

Has anyone else gone through a similar transition? If so, how did it affect your win:loss ratio and did it result in a smoother equity curve. Also, I would be interested to know if it had a positive/negative/neutral effect on overall profitability.

My personal belief is that trade management of this kind is one of the key drivers to success in trading. Certainly, my own profitability as a trader has been the direct result of employing these tactics in a disciplined manner. However, I am always looking for ways to improve/ tweek my rules and I would be grateful for any feedback on this.

It's interesting on how my own opinions about trading have changed. When I first became interested in trading, I always looked for ways of catching the big moves and could not understand why others would want to go for small, steady profits. Now I understand why. Small, steady profits with the occaisonal larger wins= low drawdowns and smooth equity curve.

Anyway, any comments most welcome.

Darren